How the Shorts Raid Your Stock, Destroy Your Company and What to Do About It

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Table of contents

• Can you "destroy" a company by shorting it? : investing
• ‘Bear Raid’ Stock Manipulation: How and When It Works, and Who Benefits
• Welcome to Reddit,

There has, however, been little academic research to explain the forces at work. Now two finance experts have shed some light on the process. That is the crucial element. Goldstein and Guembel find that the process only works when the intent is to damage the firm; traders do not have the same power to create a feedback loop that drives the share price up.

The key to the process is the short sale, when a trader borrows shares from a broker, sells them and hopes to repay the loan with shares bought later for less. The short seller profits only if the stock price falls — selling high and then buying low. If the price goes up, he has to buy replacement shares for more than he made on the ones he sold. Companies sell stock to the public to raise money. At times, enthusiastic investors may push the share price up even though there is no hard evidence the earnings will grow. At other times, investor sentiment can turn negative, driving the share price down even though the firm appears perfectly healthy.

A bear raid would therefore have no lasting effect. But if the falling share price caused by a bear raid does real economic damage to the firm, other investors are likely to dump the stock as well, causing a vicious cycle of falling share prices and economic damage that would make the bear raid more profitable. To test which scenario is more likely, Goldstein and Guembel consider a company that is about to spend money for a project with an ultimate value to the firm that cannot be exactly determined.

At the same time, there is a speculator who knows something about the value of the project that the firm does not. He may, for example, have a special insight into the likely cost of capital. If the insight suggests the spending plan will fail, he will sell the stock and the reduced demand will nudge the price down. Goldstein and Guembel then add a new element to this traditional view of the market: If the price falls, the judgment appears to be negative and the firm may abandon the plan.

Up to this point, the speculator is making a decision according to his assessment of the spending plan. But Goldstein and Guembel argue that a speculator who has no particular insight into the plan can exploit the process to deliberately drive down the share price. Big trades are executed through Wall Street market makers who, in many cases, buy and sell using their own inventories of stock. For example if you watch PSUN, then they yes were somewhat struggling, had a revenue of mln ttm and a net loss off mln and mln of debt.

So overall I would say a company with a rough balance sheet, that needs additional financing can definitely be crushed by short sellers, but a company with a strong balance sheet and solid profits can't be hurt by then, as they won't need the additional cash anyway. Let's not pretend that PSUN would have survived without the short sellers. The company's revenue and margin trends were atrocious. That's what caused the share price to begin its decline. Short sellers may have helped bring the share price down more quickly, but the company's fate was already decided.

For example, lets say there is a small biotech company that is trying to develop a life-saving drug, but a bunch of wall street traders think the business is a scam and won't go anywhere and just start massively shorting the stock, which causes other investors to panic and sell the company as well typical for penny stocks , then everyone will think the company is a fraud and thus make this small business unable to get more financing to develop their drug and eventually have to close their company. These things obviously don't happen a lot and it is impossible to destroy a financially sound business, but a shaky business going through tough times can be hastened toward their downfall, just like heavy buying of a company's stock can work wonders for the company being able to raise money really fast.

Yes, short selling can have a negative effect on companies that require additional external capital like small pharma and resource exploration.

More generally, if a prominent individual or fund takes a short position on a company, it may raise doubts about the financial health of the company. As an example, see Citron's short of Valeant leading to the disaster they've found themselves in. If you sell a share short, then basically you will have someone else sell the company's stock with you promising to buy the stock back later on hoping it would fall and you would make a profit.

So essentially if you buy a bunch of stocks then the stock price goes immediately up, if you short a bunch of stocks then the price immediately goes down. Their aggressive business development was based on the assumption that they could have secondary offerings through their yieldcos at good prices they had been very highly sought after investments while oil prices were high.

When oil tanked the yieldco prices plummeted and SUNE could no longer rely on them to generate capital via equity offerings because it would dilute the existing ownership too much and essentially they lost their primary source of capital. So in certain circumstances downward pressure can cause a company to go bankrupt. When a stock price falls, the company has a harder time accessing financial vehicles, loans, and bonds.

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Sure, but the question was "can I bankrupt a company by shorting its stock," and a company can have very worthless equity without becoming bankrupt. A short is a BET that a company's shares will drop in price. Short sellers often get it wrong and lose money. Your question also implies not mere honest short selling, but also manipulation, though, of course.

The usual reason for stock price manipulation tactics is to make money for the manipulator, independent of the operations of the company. Manipulators mainly fuck over other shareholders. Again, though, there are caveats. There is a strongly held incorrect belief that share price represents a financial asset for the company.

That is only true for the shares that the company holds itself, or if it issues new shares. For example, suppose that XYZ is a relatively small profitable company, publicly traded, and almost all of its stock is held by individual shareholders. Then she logs on with a different account some weeks later, and claims that a major scandal is about to hit XYZ.

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Panicked redditors dump the stock. She purchases shares at a lower price and closes her short sale.

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Meanwhile, however, the management at XYZ, although concerned by the stock volatility, simply run the company in its usual profitable manner. Stock price has no real effect on their day to day operations.

They perform operations for cash and pay suppliers and creditors, hell, let's say they even pay dividends. Stock price affects the shareholders massively, but has little effect, in principle, on rational management. First, of course, if management planned to sell or grant shares held by the company, or issue new shares, as a significant means of financing, then it could affect them.